The Commercial Insurance Roller Coaster

My wife and children love riding roller coasters. The longer, faster and more violent the twists, turns and such the better. The ones that take you upside down, spiral over and over and so forth are their favorites for sure. 

Me, not so much. I vividly recall riding an old wooden one on top of a North Carolina mountain’s theme park, Gold City or Ghost Town I think it was called, when I was a child and not enjoying when it went way out over the edge of the cliff nor the sense that the thing was not very well maintained. I guess you could say that I prefer my roller coasters to be a bit smoother and can do without those upside-down turns or blind drops. 

The commercial insurance marketplace is very much like a roller coaster in that too goes up and down over time based on things such as investment returns, catastrophic losses and the occasional need to catch up to social change. In fact, if you were to draw a picture of the commercial insurance market over, say 100 years or so, what you would see is that for six or so years at a time rates either decline or stay low before something happens, say a large scale catastrophic loss like a Hurricane Andrew or financial event like the Great Recession, which then forces rates up for (typically) one, two or three years. 

There are exceptions to those time frames such as worker’s compensation, state sponsored windstorm or federal flood insurance rates that frequently seem influenced by politics as much as more practical matters. Or, for that matter, you have protracted periods such as the one that’s just ended when the market, through the worst economy since the Great Depression, saw rates fall or stay low for about 12 years starting with the beginning of the Great Recession in 2007 through early 2019 before rates began to “harden”. 

Here’s an example of the cyclical, roller coaster-like, nature of commercial insurance, in this case from Barclay’s Research and depicting various commercial insurance coverages from the end of 1999 through the second quarter of 2019. You can see that rates peaked rather dramatically in 2001 as a result of the 9/11 terrorist attacks on the United States and then enjoyed a free fall through 2005 before rising again for about a year until the Great Recession led to yet another decline and a market of either mostly stable or reducing rates for 12 or so years from 2007 into 2019.  

Here’s one from another firm, in this case the insurance wholesaler MarketScout, which illustrates their data from September of 2002 through May of 2015. As you can see it follows a similar ‘track’ as the one above for much of the same period of time. 

And lastly here’s one more, in this case from the world’s largest insurance broker, Marsh, and for a shorter period of time (the third quarter of 2015 through the third quarter of 2019). In this case the table depicts global insurance prices by quarter and illustrates reductions from the third quarter of 2015 through the third quarter of 2017 and then slight (under 1%) increases from the end of 2017 to more robust increases of 5.8% and 7.8% in the second and third quarters of 2019. 

Over the past century or so you will see similar results as commercial insurance prices increase for a short period of time for one reason or another and then correct themselves for several years before the trend starts over again. Property-casualty insurers rarely make an “underwriting” profit based on the premium’s they collect and losses they pay so their investment income is especially important. In years when investments perform poorly you will often find that commercial rates increase the following year.  The same thing happens following a large catastrophe or series of such events. And once things calm for a year or two or three astute agents and brokers will find that insurers will begin competing for business by offering lower rates, more coverage and other favorable terms. 

Because of the every changing nature of the market you can frequently find folks within the industry commenting about the current market conditions or trying to forecast what might happen in the future. Here’s an example from October 2019 from the insurance magazine Advisen in which London based broker, Willis, the third largest in the world, talks about the then current market results through the third quarter:

US commercial insurance prices rose in third quarter: Willis

By Erin Ayers, Advisen

Commercial insurance prices in the United States continued rising through the third quarter of 2019, with “significant” increases across nearly every line of coverage, according to Willis Towers Watson’s Commercial Lines Insurance Pricing Survey (CLIPS). The survey showed increases across auto, property, excess/umbrella liability, and directors and officers (D&O) coverage, with an aggregate price change of over 4 percent across all commercial insurance lines. Auto, excess, and D&O all showed double-digit increases in the third quarter, Willis noted.

 “This quarter we saw the largest overall price shift since 2013,” said Alejandra Nolibos, senior director of insurance consulting and technology for Willis Towers Watson. “Price increases for D&O liability are well into the double digits, with employment practices liability and medical professional liability also showing sizable upward shifts. Commercial auto did not let up, with insureds looking at double-digit increases again.” In addition to higher prices, coverage terms and conditions have also tightened, according to the CLIPS report. Large accounts tend to see higher price changes than smaller or mid-market accounts. 

Here’s another, in this case from the November 18th 2019 edition of Insurance Journal:

2020: What to Expect in Commercial Insurance

November 18, 2019

Ongoing rate increases and reductions in capacity are taking shape in most property/casualty commercial lines in the fourth quarter–and for some, will continue into the new year, according to a recent report from broker USI Insurance Services.

Only one line–loss sensitive workers’ compensation accounts–showed lower rate forecasts for the fourth quarter vs. midyear, while seven others stayed the same. The other 20 lines, including all property lines, general liability, umbrella and cyber, had indications of higher rate changes for the fourth quarter than at midyear, according to USI’s Q4 2019-2020 P&C Insurance Market Outlook Report that looks at 28 different product lines along with forecasts from a prior midyear update compared to observations of fourth-quarter pricing.

Here at Morris & Reynolds we have long published a Market Outlook or forecast type newsletter which includes our best effort to estimate where the market is headed, emerging trends and recent issues that influence the availability and affordability of commercial insurance. You can read our 2019 edition by contacting your professional Morris & Reynolds Agent or Underwriter for a copy. 

We also frequently get called upon by our clients to help with their pro-forma insurance budgets and would be happy to discuss our views of the market and its future with you at any time. 

The never ending roller coaster ride that is commercial insurance is also one of the reasons that Morris & Reynolds has long had a unique, rigorous, annual renewal process for our clients. Over some seven decades in insurance we have seen a great many changes as the market goes up and down the tracks. Whether it’s a market influenced by a catastrophic hurricane or simply a change of direction by a given insurer our annual process seeks competitive options for our client’s coverage each year. 

The fact that we represent and access the leading insurers in the industry combined with our aggressive, annual, request for quotation process ensures that we will have the best insurers, costs and coverage possible from year to year no matter the market conditions. Ours is a laborious process but it’s one that works and one that is important given how things can change over time or, even, from year to year. 

If you have any questions about how the market works or what it is doing at a given time please contact your professional Agent or Underwriter here at Morris & Reynolds as we are most happy to assist. And for the honor of providing your protection, as always, thank you kindly.

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